Jones on CNN Money
By Bryan Caplan
My wise colleague Garett Jones has the office next to mine, so I can question him just by shouting. (We’ve got thin walls in Carow Hall). But now that Garett’s writing for CNN Money, it’s getting much easier for people other than me to find out what he’s thinking. Here‘s Garett on debt-for-equity swaps:
The advantage to this approach, said Garett Jones, an economics
professor at George Mason University in Fairfax, Va., is that it would
help to spread the losses in the financial system to shareholders and
bank creditors, instead of leaving the whole tab with taxpayers.
said the government should force debt-for-equity swaps at institutions
needing assistance. Existing shareholders would be wiped out and
current creditors would give up some of their debt claims in exchange
for ownership of the restructured firm.
In addition to being
fairer, Jones said, swapping debt for equity would reduce the amount of
debt weighing on the economy. That’s a crucial concern at a time when
the amount of domestic nonfinancial debt outstanding more than doubles
gross domestic product, according to Ned Davis Research data – a ratio
that’s well above its long-run average.
“Why should taxpayers be
bailing out firms when debtholders have plenty of skin in the game?”
Jones said. “In the current bailout, what you’re really doing is
converting the debt of these problem banks to government debt — and
that’s not what you need to do.”
Garett also answers the public’s questions (# 3, 4, 6, 7, 10 specifically) on CNN Money Summit. Sample:
Question: “The popular response to
splitting the bailout money amongst taxpayers instead of the banks is
that the recipients will save it, not spend it. Would a
government-backed ‘debit card’ or ‘gift card’ be an alternative? I feel
that it would because it would *have* to be spent and couldn’t be
saved, as cash could be.” – Will Durnan, Scottsdale, Ariz.
Answer: …If the goal is to
raise demand for consumer goods today, then yes, it would help a
But in this recession as in most, the biggest fall in
spending isn’t caused by consumers cutting back: It’s caused by
businesses cutting back. The big puzzle of recessions is why business
spending collapses. Handing debit cards to consumers probably won’t do much to get businesses buying more machines, more software and more buildings.
this recession, as in most, it’s the collapse in investment that needs
the most fixing. So in order to get economists on board with debit
cards, you’d have to show that all this extra consumer spending would
somehow cure the collapse in business spending. And there isn’t much
evidence for that idea.
Garett is one of the few macroeconomists from whom I still learn new things. Hopefully that won’t prevent him from becoming a media star!